Tuesday, December 24, 2013

The Federal Housing Finance Agency (FHFA) recently released a working paper on the impact of down payment amounts on loan performance at the GSEs and Federal Housing Administration (FHA). In light of new regulations and increased focus on underwriting standards, the agency issued the findings, and overall found a nonlinear relationship between loan-to-value (LTV) ratio and foreclosure rates.

Making sense of the story

For loans with FICO scores of 620 and debt-to-income (DTI) ratios of 31 percent, the foreclosure rate for GSE loans with 100 percent LTV is a little more than twice that of loans with 80 percent LTV.

When it comes to FHA loans with the same credit characteristics, the foreclosure rate is almost three times as much among loans with LTVs of 100 percent compared to loans with LTVs of 80 percent.

The FHFA found that the LTV-foreclosure rate relationship is sensitive to FICO. This finding was evident when observing various LTV ratios among different classes of FICO scores.

According to the FHFA, once LTV rises above 95 percent, the foreclosure rate tends to correlate less with LTV ratio.

The relationship between LTV and foreclosure is most dramatic between LTVs of 90 and 95 percent when it comes to FHA loans.

Amid new regulations and increased focus on underwriting standards, the Federal Housing Finance Agency recently released a working paper on the impact of down payment amounts on loan performance at the GSEs and Federal Housing Administration (FHA).

Overall, the federal agency found a nonlinear relationship between loan-to-value (LTV) ratio and foreclosure rates.FHFA also determined that credit score plays an important role alongside LTV ratios in determining the likelihood of foreclosure.

LTV ratios hold a stronger relationship with foreclosure rates among FHA loans than GSE loans, according toFHFA. “The implication is that the same level of change in original LTV requirement would have a larger impact forFHA borrowers than for GSE borrowers,” the FHFA stated in its working paper.

Among loans with FICO scores of 620 and debt-to-income (DTI) ratios of 31 percent, the foreclosure rate for GSE loans with 100 percent LTV is a little more than twice that of loans with 80 percent LTV.

For FHA loans with the same credit characteristics, the foreclosure rate is almost three times as much among loans with LTVs of 100 percent compared to loans with LTVs of 80 percent.

When observing various LTV ratios among different classes of FICO scores, FHFA found, “the LTV-foreclosure rate relationship is sensitive to FICO.”

For example, raising LTV from 80 percent to 90 percent on a loan for a borrower with a FICO score of 620 increased the likelihood of foreclosure by 4.46 percentage points.

Making the same change in LTV to a loan for a borrower with a FICO score of 700 increased the likelihood of foreclosure by half that—2.23 percentage points.

For FHA loans, which are more sensitive to changes in LTVratio, the relationship between LTV and foreclosure is most dramatic between LTVs of 90 and 95 percent. This trend carries across all FICO scores observed.

Once LTV rises above 95 percent, the foreclosure rate tends to correlate less with LTV ratio, according to FHFA.